Arkansas Roots

In 1978, Bill Clinton, then attorney
general, was engaged in his first gubernatorial election. By
year's end, he and his wife, Hillary, would become the youngest
First Couple in the history of Arkansas. They were rising stars
in Little Rock, but their salaries were relatively modest: Bill
made just $35,000 and Hillary just $25,000 as a young associate at
the influential Rose Law Firm.

Weeks before election day, Mrs. Clinton invested about
$1,000 in the commodities market. In the next 10 months, she would clear $100,000, an unheard-of return. James Blair, the chief
outside counsel for powerful Tyson Foods, oversaw the trades for
her.

The Clintons soon made another investment. With developer
Jim McDougal and his wife Susan, both longtime friends, they
formed the Whitewater Development Corporation to build on lots
near the town of Flippin. Questions would later be raised as to
how much risk the Clintons really bore in the deal.

When Bill Clinton lost his first bid for
re-election in 1980, Jim McDougal lost his job. The developer,
who had been Clinton's economic aide for two years, tried a new
profession: banking.

McDougal bought a small bank in Kingston and renamed it
the Madison Bank and Trust Company. Three years later, he and
Susan McDougal bought a savings and loan and renamed it Madison
Guaranty. By the end of 1983, McDougal's bank was involved in
ambitious real estate projects from Arkansas to the coast of
Maine.

Already, red flags were appearing. That same year, the S&L
started to run into trouble with federal regulators for making
too many loans outside its service area. And in 1984, the
McDougals borrowed $100,000 from Madison Guaranty to pay down the
original Whitewater mortgage.

The Clintons and Jim and Susan McDougal
were members of what was known as "the Arkansas political
family," but neither couple had much money. In 1980, they hatched
a moneymaking idea to develop forested lots along the White River
in Arkansas. Their pitch: "One weekend here and you'll never want
to live anywhere else."

The Clintons and McDougals borrowed about $200,000 from
Citizens' Bank to buy Whitewater and without telling Citizens'
they borrowed $10,000 from another bank to make the down payment.
The Clintons got a half share, although they invested much
less.

From there, the loans began to spiral as Whitewater
faltered. Just after Clinton lost the governorship in 1980,
Hillary Clinton called McDougal asking for money. He believed
that Whitewater needed a model home to attract buyers, and he
loaned her $30,000 from his small bank to build, own and
ultimately sell a three-bedroom, ranch-style unit.

By 1982, the lots still weren't selling, and the two couples
had to borrow another $20,000 just to pay interest on their
original loan. McDougal began an effort to unload the properties
and at one point,
he in effect sold the remaining 20 lots to his real
estate agent, Chris Wade, for a Piper Seminole airplane. The deal
later cost taxpayers $13,000.

At the same time, the McDougals were loaning themselves
thousands of dollars from Madison to cover the mortgage. They say
they tried to persuade the Clintons to abandon the investment.
Hillary Clinton angrily refused. Then, and for several years
after, the Clintons were taking tax deductions for interest
payments on Whitewater. The deductions were later challenged
because the interest payments came from the Whitewater Corporation
itself.

In 1988, Mrs. Clinton wrote McDougal, who was having a
mental breakdown brought on by the probing into his Madison activities, to
ask for power of attorney to sell off the remaining Whitewater
lots herself.

By the mid-1980s, Jim McDougal was rapidly
expanding the reach of Madison Guaranty. He did it by making
imprudent loans with such frequency that the Arkansas banking
commissioner warned the Clintons of shoddy practices.

Madison's losses were piling up, but the books never
showed it. David Hale, an Arkansas judge appointed by Bill
Clinton, alleges that the governor and McDougal pressured him to
arrange a $300,000 loan to help cover up the problems. Hale did
approve a loan of that amount to Susan McDougal, and $110,000
went to Whitewater. Clinton says he was unaware of this.

About the same time, Hillary Clinton, acting as a lawyer
for Madison, won state approval of an unusual stock offering to help
keep the thrift afloat (the plans were scuttled). By mid-1986, federal
regulators removed McDougal as Madison Guaranty's president. By
1989, they closed the failed S&L at a cost to taxpayers of more
than $60 million.

Hillary Clinton has denied doing any
substantial work for the failed Madison Guaranty, as well as charges
that any such work was a conflict of interest because her husband
was governor. In 1985 and 1986, Mrs. Clinton represented Madison
before state regulators appointed by Bill Clinton. One of them,
Beverly Bassett Schaffer, approved her unusual stock sale to
shore up the troubled S&L.

Exactly what else Mrs. Clinton did for Madison is in
dispute. Rose lawyers also became involved in a
1,050-acre land development called Castle Grande. McDougal and
Seth Ward, father-in-law of Rose partner Webb Hubbell, were
principals in the deal. Federal regulators would call it a "sham
transaction" that cost the public $4 million. Hillary Clinton has
claimed that a young associate, Rick Massey, effectively handled
the case, although records discovered later indicate that she
personally billed Madison for 60 hours of work.

Since the early 1970s, when he refused
money from big business in a failed run for Congress, Bill
Clinton had matured into a master political fund-raiser.
Throughout the 1980s, the governor had done what many politicians
do: take personal loans, use them for campaigning and then raise
money to repay the loans later. Clinton raised several hundred
thousand dollars this way from influential supporters like Don
Tyson, the head of Arkansas's powerful Tyson foods.

But in 1985, the governor's biggest campaign contributor
was himself, with help from Jim McDougal of Madison Guaranty. In
1985, Clinton asked McDougal to host a fund-raiser to pay off
$50,000 that he had lent his own campaign the year before, as
some politicians do. The event raised $35,000. Federal
investigators are still looking into charges that much of it came
from Madison, in the names of depositors, without their
knowledge.

Clinton's eventual successor as governor, Jim Guy Tucker,
also received large loans from Madison, and would later go on
trial with the McDougals for bank fraud. All three were
convicted.

By November 1992, the Clintons were
in a position to reward Arkansas friends who had helped them gain
the White House and safeguard them from questions about
Whitewater along the way. Webb Hubbell, Mrs. Clinton's partner at
the Rose Law Firm, was installed as Number Three at the Justice
Department, where he would play a role in federal investigations
related to Whitewater. Vincent Foster, her other close Rose
associate, handled documents related to Madison as deputy White
House counsel.

The Clintons also rewarded Harry and Linda Bloodworth
Thomason, Arkansas friends who had become successful TV
producers, when they hired Thomason acquaintances to run the
White House Travel Office.

In March 1992, just as Bill Clinton was
making a political comeback in his campaign for president, the
news media began to zero in on the Whitewater investment. It
began with a New York Times story that suggested the McDougals
heavily subsidized the Clintons in the Whitewater investment, and
that the Clintons took improper tax deductions from it. The
Clinton campaign fired back with a report showing that the couple
had made substantial investments in Whitewater and lost about
$68,000. This amount would later fall as new documents emerged.
But the story stuck, and Whitewater was dead as a campaign
issue.

Even so, attorney David Kendall and other close aides to
the Clintons begin pulling together records of the Clintons'
involvement with McDougal, Whitewater and Madison Guaranty.

Vincent Foster, the closest partner
to Hillary Clinton at the Rose Law Firm, had handled paperwork
for the Clintons' most intimate finances. When they sold their
Whitewater stake back to Jim McDougal in 1992, Foster represented
them.

In 1993, the Clinton Administration's growing troubles weighed heavily on
Foster. As deputy White House counsel, he filed three years of
tax returns for the Whitewater investment on their behalf. At the
same time, he was apparently distraught over the White House
Travel Office scandal, in which Mrs. Clinton stood accused of
cronyism.

On July 20, Foster was found shot to death in a suburban Washington, D.C.,
park. His death has been ruled a suicide by three investigations,
including, reportedly, the ongoing probe led by Kenneth Starr. Federal and
Senate investigators question whether records pertaining to
Whitewater, including those detailing Hillary Clinton's
controversial legal work, were removed from Foster's office by
Clinton aides that night.

Under increasing pressure from the
media on Whitewater, Hillary Clinton called a dramatic press
conference in the East Wing of the White House in April 1994.
She answered the questions with calm authority, momentarily silencing her critics.

She sought to put two nagging issues to rest:

First, reporters had discovered that Mrs. Clinton had
realized a $100,000 return on a $1,000 investment in commodities
futures back in 1979. Jim Blair, a friend and chief attorney for
Arkansas food giant Tyson, had advised her. Now, the first lady said
she had made the trades by herself. Later, she would admit that
Blair and others had taken the lead.

Mrs. Clinton also denied having worked on a
Madison-related project called Castle Grande, a fraudulent deal
that cost the public $4 million. She repeated her written
statement to regulators that a young Rose associate, Rick Massey,
did most of the work. That assertion was called into question
when her billing records were found in early 1996.